Emerging Markets Briefer Emerging Markets are holding up well

Transcription

1 Investment Research 21 May 2015 Emerging Markets Briefer Emerging Markets are holding up well Recently some volatility has returned to the global financial markets on the back of rising oil prices and rising rates and yields, particularly in Europe. This has caused some spillover to emerging markets, where for example the Central and Eastern European currencies have softened a bit. This said, it has hardly been dramatic and overall we believe the softness in the emerging markets markets is of a temporary nature. In relation to Central and Eastern Europe, we continue to be fairly upbeat on the macroeconomic outlook on the back of the ECB s quantitative easing and the acceleration in the recovery in the eurozone. We believe this will give support to currencies such as the Polish zloty and the Hungarian forint. This said, with deflation across the region, we do not expect central banks in the region to allow significant appreciation of their currencies. The situation in emerging Asia and Latin America is somewhat different. The recent rebound in commodity prices and particularly in oil prices is giving support to commodity exporting economies such as Brazil and Mexico. However, the outlook for rate hikes from the Federal Reserve and the renewed US dollar strength could put some pressure on both the emerging Asian and Latin American currencies in the medium term. In conclusion, overall we remain fairly upbeat on the outlook for emerging markets and particularly for the CEE markets, while we are moderately more cautious on emerging Asia and Latin America. Contents Poland... 2 Czech Republic... 3 Hungary... 4 Baltics... 5 Russia... 6 Ukraine... 7 Kazakhstan... 8 Turkey... 9 South Africa Brazil China India Hedging recommendations s vs forwards Monetary policy calendar Growth in the CEE economies Deflationary pressures Senior Analyst Flemming Jegbjærg Nielsen flemm@danskebank.dk Important disclosures and certifications are contained from page 22 of this report.

2 Poland Macro outlook We are becoming somewhat more optimistic about the outlook for the Polish economy mostly on the back of the significant improvement in the outlook for the eurozone. So, while we expect lower GDP growth in 2015 than in 2014, we expect it to pick up during the year and into Hence, we now expect growth of 2.9% in 2015 and 3.2% in 2016 and we currently believe that the risks to our forecasts are mostly on the upside. Monetary policy outlook Polish inflation continues to undershoot significantly the central bank s (NBP) 2.5% target and we are likely to see continued deflation in the coming months. With the zloty continuing to strengthen, there should be room for more rate cuts. However, the pick-up in Polish growth is likely to reduce the feeling of urgency in regard to further rate cuts. FX outlook The zloty has weakened recently after a period of appreciation. As a result we have lifted our 1M, 3M and 6M EUR/PLN forecasts moderately. Looking forward, we would expect the appreciation trend to resume in the coming months. The currency is supported by both a moderately more positive outlook for growth and the ECB s QE programme. Solid fundamentals support PLN strength. The biggest risks at the moment come from possible contagion from the Russian crisis and potential renewed uncertainty about the situation in the eurozone. In addition, the substantial move higher in German Bunds could trigger foreign selling of Polish bonds, weakening PLN. Polish economy faces deflation Record-low policy rate PLN Credit rating: S&P: A- (positive) Currency regime: Free float (freely convertible) Inflation target: 2.5% +/-1pp Macro forecasts, Danske Bank Markets Interest rate forecast GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) Policy rate National Bank of Poland (NBP) 1.50 Next meeting 03 June 2015 Next change - Unchanged 2015 End EUR/PLN 19-May M M M USD/PLN 19-May M M M May

3 Czech Republic Macro outlook Czech GDP grew 2.0% in 2014, up from -0.7% in both 2013 and Indicators for the macro economy in 2015 have generally been on the positive side with lower unemployment and increasing retail sales. We currently forecast GDP at 2.7% y/y in 2015 and 3.1% y/y in We expect GDP to be supported in 2015 by stronger external demand, the low oil price and expansionary fiscal policy. Looking at inflation, headline CPI growth was 0.5% y/y in April, up from 0.2% y/y in March. However, the monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effect of indirect taxes, was lower than headline CPI (latest: 0.0% y/y in March). Our inflation model indicates that inflation in 2015 is expected to average 0.0%. Together with base effects and a higher oil price, we expect to see inflation approaching the 2% target next year. The actual development in the oil price is a risk factor in this forecast. The Czech current account showed an historical surplus of 0.6% of GDP in Furthermore, the monthly current account figures from January and February came out very strong, indicating that the surplus will continue in Monetary policy outlook The Czech central bank (CNB) has been trying to curb deflationary pressures by keeping a floor under EUR/CZK at 27. We believe the CNB will defend the floor but there is a risk that political pressure to give it up mounts if there are substantial inflows into the CZK. FX outlook The CZK has appreciated against the EUR since mid January from a level above 28 and is now trading at Besides the ECB bond purchase programme, the current account surplus also adds a little to this appreciation pressure. Furthermore, from a longer-term perspective the CZK is somewhat undervalued in our view. Given the undervaluation of the CZK, we are likely to see EUR/CZK move close to the 27 floor in the coming year. Note that our EUR/CZK forecasts are unchanged compared to last month. Historical current account surplus in 2014 Floor under EUR/CZK to curb deflationary pressures CZK Credit rating: S&P: AA- (stable) Currency regime: Free float (freely convertible) Inflation target: 2% +/-1pp Macro forecasts, Danske Bank Markets Interest rate forecast GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) Policy rate Czech National Bank (CNB) 0.05 Next meeting 25 Jun 2015 Next change - Unchanged 2015 End EUR/CZK 19-May M M M USD/CZK 19-May M M M May

4 Hungary Macro outlook Growth has been picking up in Hungary and, after years of stagnation, it is becoming one of the fastest-growing economies in central and eastern Europe. However, structural problems and weak domestic demand continue to weigh on economic activity. Real GDP growth was 3.6% in 2014 up from 1.6% in We expect growth of 3.3% in Hungary has seen a substantial improvement in external balances in recent years. The improvement in external balances partly reflects the continued improvement in Hungarian public finances but also still weak domestic demand. This is by far the most positive element in the Hungarian economy. Continued high political risk and very unorthodox economic policy, on the other hand, continue to weigh significantly on Hungary s long-term growth perspectives. Monetary policy outlook The Hungarian central bank (MNB) has been cutting interest rates in small steps. This has been justified as there is actually deflation now in Hungary (despite higher growth) and there is certainly a risk of further deflation in coming months. This said, we expect inflation to pick up somewhat mostly on base effects. This limits the scope for further rate cuts, although continued forint appreciation could reopen the door to such action. FX outlook HUF has weakened recently on broader EUR strength and higher global yields. As a result, we have lifted our EUR/HUF forecasts moderately. We continue to believe that Hungary s fairly strong external position is likely to be supportive for the HUF in the medium term. Furthermore, fairly strong growth and an expected pickup in inflation are likely to keep the carry on the forint relatively attractive. Therefore, we continue to expect medium-term appreciation of the forint. The biggest risk is possible contagion from the Russian crisis but there is also the continued risk of missteps in the Hungarian political-economic policy process. In addition, the sharp move higher in German yields may trigger foreign selling of Hungarian bonds, weakening the HUF. HUF Credit rating: S&P: BB (stable) Currency regime: Free float (freely convertible) Inflation target: 3% (medium term) Macro forecasts, Danske Bank Markets Interest rate forecast GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) Policy rate Hungarian Central Bank (MNB) 1.80 Next meeting 26 May 2015 Next change - 15 bp Q End Deflation Growth has picked up EUR/HUF 19-May M M M USD/HUF 19-May M M M May

5 Baltics Economic growth slowed down significantly in all three Baltic countries in Q1 15. The Latvian economy proved to be the most dynamic of the three, particularly due to export resilience in the context of falling trade with Russia. In Q1 the Latvian economy grew 2.1%, the Estonian 1.8% and the Lithuanian 1.5% y/y. We expect growth to rebound in the second half of 2015, on average 2.2% in Estonia, 2.6% in Latvia and 2.5% in Lithuania. Estonian macro outlook Driven by rising wages and low prices, Estonian consumers are the most upbeat in the Baltics retail trade expanded by 7.6% y/y in Q1. Average inflation in Q1 was negative at -0.2% but turned positive in April (+0.4%). Geopolitical tension has had a strong effect on business confidence in Estonia. Despite the expansion in retail trade, services and industrial production, business confidence in these sectors has been declining recently and is at the lowest since the crisis. As a result, investment growth has been negative in Estonia for three consecutive quarters. Estonian exports to Russia in real terms contracted more than Russian imports by 47% and 34% respectively. This is on top of the 15% contraction of exports to Russia in Nevertheless, overall Estonian exports in Q1 expanded 3%, while imports expanded 1%. Estonian exports to the EU increased 9% in Q1. Latvian macro outlook After a relatively slow end of the year, consumption in Latvia seems to have gathered pace at the beginning of Retail trade grew 7.5% y/y in Q1. Average inflation in Q1 was positive at 0.1% and increased to 0.6% in April. Estonia Credit rating: S&P: AA- (stable) Currency: EUR since 1 Jan 2011, Danske Bank Markets estimates Latvia GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) Credit rating: S&P: A- (stable) Currency: EUR since 1 Jan GDP (% y/y) Just as in Estonia, investment growth in Latvia has stalled recently. After positive growth in H1 14, it turned negative in Q3 14 (-1.7%), slightly positive in Q4 14 (+0.4%) and is likely to have stayed in negative territory in Q1 15. Latvia proved to be the most resilient in terms of export growth in Q1. Its exports to Russia in real terms contracted only 26%, while its exports to the EU grew 9%. Its overall exports expanded 5%, imports 2%. GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) , Danske Bank Markets estimates Lithuanian macro outlook Growth in retail trade in Lithuania in Q1 was less marked than its Baltic neighbours. After a very active December (+8.2%), retail trade in Q1 expanded 3.7% y/y. Inflation was negative in Q1 at -1.3% and stayed negative in April at - 0.6%. Lithuania Credit rating: S&P: A- (stable) Currency: EUR as of 1 Jan 2015 Record high capacity utilisation rates in Lithuania are likely to have kept investment growth positive in Q1 despite the slump in business confidence compared to the beginning of If the geopolitical tensions subside, this should drive up investment growth to 6-7% towards the end of Lithuanian real exports to Russia contracted 30% in Q1. The Russian shock is most felt in Lithuania, as Russia is the single most important export partner for Lithuania, accounting for more than 20% of Lithuanian exports before the current crisis. Due to a very robust export growth to the EU in Q1 (+12% y/y), total exports avoided contraction and expanded 0.2% in Q GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) ,,2 Current account (% of GDP) , Danske Bank Markets estimates 5 21 May

6 Russia Macro outlook We expect the economy to bottom out in Q2, due to a lag in monetary policy which had been tightened and is keeping fixed investment and private consumption growth deeply negative. The March consensus, excluding our forecast (-7.9% y/y), was for the Russian economy to shrink 4.0% y/y in 2015 (average) and grow 0.5% y/y in Fitch didn t join its peers in April in cutting Russia s ratings, instead it left its FX long-term debt ratings unchanged at just above junk. The finance ministry does not plan to issue any FX debt in The downgrades by Standard & Poor s and Moody s to junk have raised yields on corporate debt. Fixed investment growth remained in negative territory for the 15th month in a row in March, falling 5.3% y/y as corporate rouble loans cost around 30% p.a. We expect fixed investment to fall 12% y/y in 2015 and residential construction expansion to come to a halt on a fall in real incomes, the volatile rouble and high interest rates. Unemployment remains low, climbing to 5.9% in March, from 5.8% a month earlier. We expect it to reach 8.0% in 2015 but not to exceed the 2009 level. We believe the devalued rouble is protecting public sector jobs better than in the previous crisis. Yet, we see upside risk to our forecast as the rouble s average rate has remained stronger than our fair value (55.8 to the USD) at the current oil price of around USD66.7/bbl. FX and monetary policy outlook On 30 April, the Central Bank of Russia (CBR) cut the key rate by 150bp to 12.5%. The main reason given by the central bank for the cut was lower inflation risks and persistent risks of considerable cooling of the economy. We expect the CBR to ease further during 2015, ending up at 8% in December As the quickly strengthening rouble is leading to concern about fiscal stability, the CBR continues to restrain the upside. It has raised FX repo rates and returned to the spot market, buying USD m per day to replenish the country s FX reserves which were tapped in early 2015 for budget expenditures. Inflation stabilised in April, falling from 16.9% y/y a month earlier to 16.4% y/y on improved inflation expectations due to the strengthened rouble. We expect CPI to slow to 10% y/y by the end of 2015, giving the CBR more than enough room to continue easing. The partial recovery in the rouble since the start of the year is mostly a result of a stabilisation in global oil prices and improved sentiment, in our view. However, we still view the geopolitical situation around Ukraine as fragile, making escalation very possible, which poses downside risk to our RUB forecast. Risk factors We continue to believe that a sharp decline in the oil price remains the major risk. We base our macro forecasts on the average Brent price in 2015 of USD60/bbl. RUB Credit rating: S&P: BB+ (negative) Currency regime: Free float since 10 November 2014 Inflation target: 4% in 2017 (December-on- December basis, ±1.5pp) Macro forecasts, Danske Bank Markets Interest rate forecast GDP (% y/y) CPI (% Dec/Dec) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) Bank of Russia (CBR) Policy rate Next meeting 15 Jun 2015 Next change bp Q End EUR/RUB 19-May M M M USD/RUB 19-May M M M May

7 Ukraine Macro outlook Preliminary GDP growth data showed that the recession has deepened: the economy contracted 17.6% y/y in Q1 15 versus a 14.8% y/y fall a quarter earlier. The economic situation is deteriorating on accelerating inflation, private consumption diving and plunging industrial production and as the geopolitical situation in Eastern Ukraine is uncertain and weighing overwhelmingly on the economy. We therefore expect GDP to fall by 8.5% y/y in The slump in private consumption continues due to the volatile hryvnia and falling purchase power on increased tariffs. Inflation accelerated to 60.9% y/y in April 2015, from 45.8% y/y a month earlier. The country is facing a huge challenge to restructure its debt as the deadline to reach an agreement on it in June 2015 is approaching. Ukraine has to restructure almost USD23bn of its debt to gain approval to receive the IMF s next tranche. The ministry of finance is trying to get haircuts on coupons in the face of opposition from creditors. We believe the IMF will try its best to avoid a default this summer. However, there are too many parties involved to come to a resolution easily, in our view. There have been only occasional headlines about shootings in Eastern Ukraine in the past 30 days. Nevertheless, in our view the situation remains very fragile, and parties continue to blame each other for violations of the Minsk agreement. FX and monetary policy outlook Over the past 30 days, the UAH has stabilised at around against the USD as the IMF tranche has reached the economy and a new one is possible this summer. Yet, despite the fact that the IMF programme is supporting the UAH, tight capital controls are limiting access to FX for economic agents. UAH Credit rating: S&P: CCC- (negative) Currency regime: Managed peg versus USD EUR/UAH 19-May M N/A +6M N/A +12M N/A USD/UAH 19-May M N/A +6M N/A +12M N/A, Danske Bank Markets On 4 March, the National Bank of Ukraine tightened monetary policy, hiking its policy rate to 30% the world s highest from 19.5%. However, this is not having any impact on the accelerating inflation. Risk factors An escalation of the geopolitical situation and the country s default are the major economic risks in the current environment. Private consumption freefall continues Industrial and agricultural production 7 21 May

8 Kazakhstan Macro outlook GDP growth slowed to 2.5% y/y in January-February from 4.3% y/y in 2014 as the lower oil price weighed on the economy and energy sector. In Q1 15, the average oil price was 28% lower than the previous quarter. We expect growth to slow to 1.2% y/y in 2015, assuming an average Brent oil price of USD60/bl this year. Consumer price growth slowed further to 4.6% y/y in April, from 5.2% y/y a month earlier, as the peg restrained price growth and economic activity slowed. However, we expect further acceleration, as we expect a 30% devaluation of the KZT in On 26 April, the 74-year old president, Nursultan Nazarbaev, won the early presidential elections overwhelmingly with almost 98% of the votes, to start his fifth term. The victory was seen by markets as strengthening political and economic stability amidst elevated geopolitical challenges in neighbouring countries. FX and monetary policy outlook The pressure on the pegged KZT from the lower oil price and volatile Russian rouble continues. We expect to see a devaluation in H2 15 to ensure fiscal stability and better competitiveness with the Russian economy. The National Bank of Kazakhstan (the NBK) has announced it will introduce inflation targeting in The shift will be done in stages, with the exchange rate corridor maintained during the transition period. We see it as the beginning of greater FX flexibility which will lead to higher volatility in the market. The NBK has retained the option to intervene. The central bank intends to introduce a base rate as a monetary policy tool. Monetary policy rates will be linked to the new base rate in the future. Risk factors The low oil price is the major risk for the Kazakh economy currently, in our view. Russia s recession in 2015 is set to inflict extra pressure. Political risk has receded due to Nazarbaev s victory. KZT Credit rating: S&P: BBB (negative) Currency regime: Corridor versus USD EUR/KZT 19-May M N/A +6M N/A +12M N/A USD/KZT 19-May M N/A +6M N/A +12M N/A Source: Bloomberg, Danske Bank Markets GDP and inflation Industrial production growth 8 21 May

9 Turkey Macro outlook Falling energy prices and the decelerating CPI are yielding better prospects for the Turkish economy in We expect the economy to expand by 3.2% y/y in 2015 (previously 2.8% y/y). Lower oil prices are set to reduce the large Turkish current account deficit significantly. However, political risks and pressure on the central bank are weighing on sentiment. Industrial production rose 4.7% y/y in March 2015, with mining and non-durable consumer goods production rising the most on a weakened TRY. Consumer confidence improved slightly in April 2015, as private consumers see better borrowing opportunities and increasing spending on semi-durable goods within the next three months. The unemployment rate had been climbing since May 2014, posting 11.3% in January 2015, but then began to ease, decreasing to 11.2% in February: we expect the steady decline in unemployment this year to continue, as prospects look supportive for Turkish exports and domestic demand. Monetary policy outlook The Turkish central bank has been under considerable political pressure to cut interest rates to revive the economy, as the June parliamentary elections approach. However, the historically weak lira is limiting the ability to cut. All rates were kept unchanged in April. Inflation accelerated to 7.9% y/y in April, from 7.6% a month earlier, due to weakened TRY. However, the currency developed moderately in early 2015, staying under 8% y/y in January to April. Thus, it keeps the central bank s stand dovish. We expect the rates to stay unchanged at the next monetary policy meeting on 20 May. FX outlook Lira sentiment remains negative and the lira continues to offer carry. In our view, pressure on the central bank to ease in 2015 is lira negative in the medium term. We continue to expect the lira to weaken over the coming year, while the sell-off may accelerate in the autumn if the Fed hikes. However, we expect more moderate weakening than the forward curve suggests due to the Turkish economy s improving macro fundamentals. Turkey s GDP growth Current account deficit narrows TRY Credit rating: S&P: BB+ (negative) Currency regime: Free-float (freely convertible) Inflation target: 5.0% year-end 2014 Macro forecasts Interest rate forecasts GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) C.B. of the Republic of Turkey (TCMB) Policy rate 7.50 Next meeting 20 May 2015 Next change - 50 bp Q End EUR/TRY 19-May M M M USD/TRY 19-May M M M , Danske Bank Markets 9 21 May

10 South Africa Macro outlook The South African economy remains weak, with prolonged strikes having had a very negative impact on both private consumption and investments. Indeed, estimates from the South African Reserve Bank (SARB) state that the strike has subtracted at least one percentage point from GDP growth in For 2015 and 2016 we forecast GDP growth of 2.1% y/y and 2.3% y/y, respectively. ZAR Credit rating: S&P: BBB- (stable) Currency regime: Inflation in March was unchanged at 4.0% y/y, which implies that the inflation rate has been declining since May 2014, due primarily to the falling oil price. The current account deficit is still large (5.1% of GDP in Q4 2014) and makes the South African economy vulnerable to external shocks. Free float (freely convertible) Inflation target: 3%-6% Monetary policy outlook At the last monetary meeting in March the SARB kept its repo rate unchanged at 5.75%. During 2014 the SARB emphasised that South Africa was in the process of interest rate normalisation (i.e. higher interest rates) to deal with inflation rates above the upper end of the inflation target of 3-6%. However, the recent lower inflation path as well as uncertainty about US policy and weak domestic demand have paused this process. We expect the SARB to stay on hold for some time. FX outlook Given South Africa s external imbalances, the ZAR remains highly exposed to swings in risk sentiment. However, given the recent increase in commodity prices, we have revised our forecast in a less negative direction. Hence we have lowered our 3M, 6M and 12M USD/ZAR forecasts to 12.00, and from 12.10, and previously. Compared with market expectations, we are positive on all horizons. Macro forecasts Interest rate forecast Policy rate GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) South African Reserve Bank (SARB) 5.75 Next meeting 21 May 2015 Next change - Unchanged, 2015 End Inflation has declined since May 2014 pausing interest rate normalisation EUR/ZAR 19-May M M M USD/ZAR 19-May M M M , Danske Bank Markets May

11 Brazil Macro outlook Growth in Brazil has slowed markedly, as the commodity boom has faded and weakened the outlook for investment demand from the commodity-dependent industries. The lower crude oil price is on balance only slightly negative for Brazil but the plunge in prices for iron ore and soya beans hurts Brazil substantially. Because of weak public finances and weak external balances, fiscal and monetary policy have been tightened. This has worsened the slowdown in growth. Fiscal policy has been tightened mainly by cutting subsidies and increasing administered prices. We expect GDP to contract in 2015 on the back of tighter fiscal and monetary policy and weak investment demand in commodity-dependent industries. We expect a moderate recovery in H2 15 but compared with Brazil s recent boom years, the outlook for growth will remain subdued as long as commodity prices do not recover. IPCA inflation accelerated further in April to 8.2% y/y, from 8.1% y/y in March, and appears close to peaking. The increase in recent months has been driven to some degree by higher administered prices but the plunge in the BRL is also having an effect. Monetary policy outlook The Brazilian central bank (BCB) raised the Selic rate by another 50bp to 13.25% in connection with its monetary policy committee (Copom) meeting in April. This was the sixth interest rate hike since the presidential election in October, underscoring that BCB has turned substantially more hawkish since the election. With inflation above the BCB s target, we believe another 50bp interest rate increase is likely but, in our view, this will probably be the peak for leading interest rates. FX outlook and risk factors It is too early to call the bottom on BRL in our view despite some stabilisation in the past few months. We remain bearish, especially on a three- to six-month horizon, as (1) lower commodity prices will continue to weigh in the short run, albeit there are signs of commodity prices having bottomed out; (2) Brazil is one of the emerging markets most sensitive to interest rate hikes in the US due to its weak external balances and the large share of foreign investors in Brazilian bonds; (3) increasing political uncertainty makes it difficult for incumbent President Dilma Rousseff and her new government to implement austerity measures and (4) a downgrade by Moody s of Brazil s credit rating could be just around the corner, although Brazil will probably keep its investment grade rating. BRL Credit rating: S&P: BBB- (stable) Currency regime: Free float (non-convertible) Inflation target: 4.5% +/- 2% points Interest rate forecasts Central Bank of Brazil (BCB) Policy rate Next meeting Jun 2015 Next change +50bp Q2, 2015 End EUR/BRL 19-May M M M USD/BRL 19-May M M M , Danske Bank Markets External balance deteriorating Lower commodity prices hurt May

12 China Macro outlook GDP growth slowed to 7.0% y/y in Q1 and weak data released for March and April suggest it will fall below the government s 7% target in Q2 15. Weak domestic investment demand, particularly housing construction, is the main source of the current weakness. We expect to see a moderate recovery in H2 15 supported by the current monetary easing. Beyond 2015, an unavoidable structural slowdown will continue to weigh on China s growth, in our view. China s foreign trade surplus has surged as the country s import prices have plunged on the back of the sharp fall in oil and commodity prices. In addition, in our view, China does not face an export crisis, although export growth has disappointed in recent months. China has very strong external balances and relatively healthy public finances. Hence, it still has policy tools and flexibility to avoid a hard landing despite the substantial credit growth in recent years. This said, we believe focus on structural reforms and reluctance to add substantial stimulus increase the downside risk to growth in China in both 2015 and Monetary policy outlook The People s Bank of China (PBoC) currently has a clear easing bias and has cut its leading interest rates by 25bp three times since October We expect it to cut the leading interest rates by another 25bp and the reserve requirement by at least 100bp in the coming months. Money market rates have finally started to decline substantially over the past month following more aggressive liquidity injections by the PBoC. FX outlook In the past two months, the appreciation pressure on USD/CNY has eased and USD/CNY is no longer trading at the ceiling in the daily trading band. We still expect the CNY to appreciate moderately within the daily trading band over the next year. In our view, PBoC will not start targeting a substantially weaker CNY to support growth. China s ambition to have CNY included in the SDR later this year is likely to make China act like a responsible stakeholder in the global financial system. Despite recent liberalisation, China s capital account is still relatively closed and the negative impact on the currency from lower interest rates remains modest. China s trade balance surplus is increasing markedly on the back of lower commodity prices and reasonable growth in exports. However, the potential for lower USD/CNY will be modest in the short run due to our expectations of general USD strength. CNY Credit rating: S&P: AA- (stable) Currency regime: Crawling USD peg Inflation target: 3.5% for 2014 Interest rate forecast People's Bank of China (PBOC) Policy rate Next meeting 5.10 Not announced Next change - 25 bp Q End EUR/CNY 19-May M M M USD/CNY 19-May M M M , Danske Bank Markets Depreciation pressure has eased 7% growth target looking difficult May

13 India Macro outlook India is well placed for a cyclical recovery in 2015 and 2016 as it is benefiting substantially from the lower oil price, improving external and domestic balances have left room to ease both fiscal and monetary policy and India has a relatively strong government, which at least to some degree has sped up structural economic reforms. India s GDP growth could exceed 7% in coming years. The general election last year gave the main opposition party BJP an outright majority in the Lower House. Hence, compared with the past two decades, India has a relatively strong government with substantial political room to accelerate economic reforms. INR Credit rating: S&P: BBB- (stable) Currency regime: Free float Inflation target: 5% medium term India s current account deficit has declined markedly to around 2% of GDP and should decline further due to the recent sharp decline in the crude oil price. Due to the sharp improvement in the current account, we no longer regard India as among the fragile emerging markets. Monetary policy outlook The Reserve Bank of India (RBI) has moved from targeting wholesale prices to targeting consumer price inflation within 4% +/-2%. It is a gradual adjustment and for end-2015 the target is 6%. Inflation has declined much faster than expected, due partly to the lower oil price, and this has left room for the RBI to start cutting interest rates. So far, it has cut its leading interest rate twice by 25bp since December and we expect another 25bp interest rate cut in Q2. With the Fed expected to start hiking in H2 15, it will be more difficult for RBI to continue to cut rates. FX outlook We believe that the INR will be one of the best-performing Asian currencies in 2015, although it will weaken a bit against the USD. The main reasons are (1) a marked improvement in the current account that will continue in the wake of the recent fall in the crude oil price, (2) possible acceleration in economic reforms under a strong new BJP-led government, (3) a credible/hawkish central bank and (4) a gradual cyclical recovery in India. In H2 15, gradual monetary tightening in the US should start to weigh on the INR. However, because the Indian money and bond markets are relatively closed, India should also be less sensitive to higher interest rates in the US than other emerging markets. Hence, a major depreciation is unlikely. External balances have improved markedly Inflation still below target aided by the lower crude oil price Interest rate forecast Reserve Bank of India (RBI) Policy rate Next meeting Jun 2015 Next change - 25 bp Q End EUR/INR 19-May M M M USD/INR 19-May M M M , Danske Bank Markets, Danske Bank Markets, Danske Bank Markets May

14 FX hedging PLN and HUF appreciation trend to resume We have lifted our EUR/HUF and EUR/PLN forecast moderately following the recent softness in CEE currencies caused by a broad-based sell-off in global financial markets. Overall, however, we remain fairly upbeat on the outlook for the CEE markets and looking ahead, we expect the appreciation trend in the CEE currencies to resume in the coming months. The more positive outlook for growth, both internally and across the rest of Europe, and the ECB s QE programme should continue to give support to currencies such as the Polish zloty and the Hungarian forint. In this respect, note that the announcement from the ECB regarding the frontloading of its asset purchases in May and June is a factor supporting the case for renewed EUR weakness. Hedge PLN and HUF expenses via FX forwards Given our relatively bullish view on the CEE currencies, we recommend EURand DKK-based corporates to lock in expenses in the coming 6-12 months via FX forwards, profiting from the relatively large yield spread between the EUR and PLN and HUF respectively. Hedge PLN and HUF income via knock-in forwards We recommend EUR- and DKK-based corporates to hedge HUF and PLNdenominated income via strategies that maintain a profit potential if EUR/HUF and EUR/PLN decline further. FX forecast for PLN and HUF EUR/PLN EUR/HUF 19-May M M M Source: Bloomberg, Danske Bank Markets Implied volatility has increased substantially over the past months Specifically, we recommend hedging the next 12 months income via knock-in forwards with a one-month barrier window, thereby capitalising on the relatively high option-market implied volatility, which according to our models trades close to expensive territory following the recent surge. By choosing a knock-in barrier with a 1M open window rather than a European knock-in barrier applicable only at the expiry date, the company secures a possibility of obtaining a significantly lower knock-in barrier level at the same worst-case exchange rate (strike). This reduces the risk of having to buy at a higher EUR/HUF or EUR/PLN rate. In a 12M strategy with one payment per month, the barrier on the first payment will be active from the date the strategy is entered and until the elapse of one month (expiry). Then the next barrier window applying for the coming month until the next payment date is activated and so on. The following applies to each of the 12 payments. The company will have a known worst-case exchange rate (strike) if the spot rate is higher than the strike at the payment date. If at no time during the month up to the payment date did the spot rate trade below the knock-in barrier, the company has the option of selling at the current spot rate. If, on the other hand, the spot rate at any time during the month up to the payment date, traded below the knock-in barrier, the company will be required to buy at the strike irrespective of the spot rate at the payment date. Implied volatility valuation Currency pairs 3M 6M 12M EUR/HUF Neutral Neutral Neutral EUR/CZK Neutral Neutral Neutral EUR/PLN Neutral Neutral Neutral EUR/TRY Neutral Neutral Neutral EUR/RUB Neutral Neutral Neutral Valuation: Cheap Neutral Expensive Source: Bloomberg, Danske Bank Markets May

15 Currency Danske Bank Markets hedging recommendations: EMEA Income We recommend hedging PLN income via knock-in forwards. Consider a window barrier instead of a European knock-in barrier in order to capitalise on the relatively high implied volatility. Instrument Expenses We recommend hedging PLN expenses via FX forwards PLN Currency RUB Currency Price indicators implied volatility risk reversal (PLN seller) forward rate (PLN seller) Income We recommend hedging RUB-income via FX forwards. Price indicators implied volatility risk reversal (RUB seller) forward rate (RUB seller) Income We recommend hedging HUF-income via knock-in forwards. Consider a window barrier instead of a European knock-in barrier in order to capitalise on the relatively high implied volatility. cheap neutral expensive Instrument Expenses Hedge RUB expenses via a participating forward. cheap neutral expensive Instrument Expenses We recommend hedging HUF-expenses via FX forwards EUR/PLN 3.90 Forward Consensus Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 3M 6M 12M DB forecast Forward Cons EUR/RUB 30.0 Forward Consensus Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 3M 6M 12M DB forecast Forward Cons HUF Currency Price indicators implied volatility risk reversal (HUF seller) forward rate (HUF seller) Income We recommend hedging CZK income via knock-in forwards. Instrument Expenses We recommend hedging CZK expenses via a risk reversal strategy. 290 EUR/HUF 280 Forward Consensus Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 3M 6M 12M DB forecast Forward cheap neutral expensive Cons CZK Price indicators implied volatility risk reversal (CZK seller) forward rate (CZK seller) cheap neutral expensive 26.0 EUR/CZK 25.0 Forward Consensus Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 3M 6M 12M DB forecast Forward Cons May

16 Currency Danske Bank Markets hedging recommendations: other emerging markets Income We recommend hedging CNH income via a participating forward. Instrument Expenses We recommend hedging CNH expenses via FX forwards CNH Currency Price indicators implied volatility risk reversal (CNH seller) forward rate (CNH seller) Income Hedge MXN income via knock-in forwards. cheap neutral expensive Instrument Expenses We recommend hedging MXN expenses via FX forwards EUR/CNH 6.00 Forward Consensus Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 3M 6M 12M DB forecast Forward Cons MXN Currency Price indicators implied volatility risk reversal (MXN seller) forward rate (MXN seller) Income Hedge ZAR income via knock-in forwards. cheap neutral expensive Instrument Expenses We recommend hedging ZAR expenses via FX forwards EUR/MXN 14.0 Forward Consensus Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 3M 6M 12M DB forecast Forward Cons ZAR Currency Price indicators implied volatility risk reversal (ZAR seller) forward rate (ZAR seller) Income Hedge TRY income via knock-in forwards. cheap neutral expensive Instrument Expenses We recommend hedging TRY expenses via FX forwards EUR/ZAR 11.0 Forward Consensus Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 3M 6M 12M DB forecast Forward Cons TRY Price indicators implied volatility risk reversal (TRY seller) forward rate (TRY seller) cheap neutral expensive 2.25 EUR/TRY 2.00 Forward Consensus Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 3M 6M 12M DB forecast Forward Cons May

17 Core major EUR USD JPY EUR USD DKK SEK NOK 19-May M M M May M M M May M M M , Danske Bank Markets Wider CEE PLN HUF CZK RON EUR USD DKK SEK NOK 19-May M M M May M M M May M M M May M M M , Danske Bank Markets CIS RUB UAH KZT EUR USD DKK SEK NOK 19-May M M M May M N/A N/A 23.8 N/A 30.0 N/A 26.8 N/A +6M N/A N/A 22.1 N/A 27.3 N/A 24.5 N/A +12M N/A N/A 17.3 N/A 20.8 N/A 18.9 N/A 19-May M N/A N/A 2.9 N/A 3.6 N/A 3.2 N/A +6M N/A N/A 3.0 N/A 3.8 N/A 3.4 N/A +12M N/A N/A 2.7 N/A 3.2 N/A 2.9 N/A, Danske Bank Markets May

18 MEA TRY ZAR ILS EUR USD DKK SEK NOK 19-May M M M May M M M May M M M , Danske Bank Markets Latin America BRL MXN EUR USD DKK SEK NOK 19-May M M M May M M M , Danske Bank Markets May

19 Emerging markets Asia CNY KRW THB SGD HKD MYR PHP IDR INR TWD EUR USD DKK SEK NOK 19-May M M M May M M M May M M M May M M M May M M M May M M M May M N/A N/A N/A N/A N/A +6M N/A N/A N/A N/A N/A +12M N/A N/A N/A N/A N/A 19-May M M M May M M M May M M M , Danske Bank Markets May

20 s vs forwards 3M base currency EUR % M base currency USD % RUB SGD PLN CZK KRW RON MYR HUF TWD BRL IDR INR TRY MXN ZAR CNY ILS RUB SGD PLN CZK KRW RON MYR HUF TWD BRL IDR INR TRY MXN ZAR CNY ILS, Danske Bank Markets, Danske Bank Markets 6M base currency EUR 6M base currency USD % ILS ZAR CNY MXN INR IDR TRY KRW MYR BRL TWD SGD HUF PLN RON CZK RUB % ILS ZAR CNY MXN INR IDR TRY KRW MYR BRL TWD SGD HUF PLN RON CZK RUB, Danske Bank Markets, Danske Bank Markets 12M base currency EUR 12M base currency USD % ZAR CNY IDR TRY INR ILS MXN HUF BRL PLN RON MYR CZK KRW TWD SGD RUB % ZAR CNY IDR TRY INR ILS MXN HUF BRL PLN RON MYR CZK KRW TWD SGD RUB, Danske Bank Markets, Danske Bank Markets May